Lexmark International, Announces financial results for the first quarter of 2015

LEXINGTON, Ky., April 28, 2015 — Lexmark International, Inc. today announced financial results for the first quarter of 2015.

“Despite a strong currency headwind, Lexmark delivered revenue and EPS at the top of our January guidance range,” said Paul Rooke, Lexmark chairman and chief executive officer. “Double-digit revenue growth in Higher Value Solutions is another clear indication that our transformation strategy is working.

“Our Annuity revenue represents approximately 70 percent of Core revenue, fueling Lexmark’s ability to invest in growing our Higher Value Solutions capabilities while also returning capital to shareholders through dividends and share repurchases.”

First Quarter Results

• Delivered revenue and EPS at the top of the company’s January guidance range.

First Quarter GAAP Results

• Revenue of $852 million in 2015 compares to $878 million in 2014.
• Gross profit margin of 38.7 percent compares to 38.9 percent in the same period last year.
• Operating income margin was 5.0 and 6.1 percent in 2015 and 2014, respectively.
• EPS of $0.32 in 2015 compares to $0.46 in the same period last year.

First Quarter Non-GAAP Results

• Revenue of $855 million in 2015 compares to $881 million in 2014.
• Core revenue² of $807 million was about flat year to year, but grew 6 percent at constant currency³.
• Gross profit margin of 40.5 percent compares to 41.0 percent in the same period last year.
• Operating income margin was 9.5 percent and 10.4 percent in 2015 and 2014, respectively.
• Adjusted EBITDA⁴ of $123 million in 2015 compares to $137 million in 2014.
• Static non-GAAP tax rate is 30.0 percent, approximately flat with the year ago period. The company has adopted a static non-GAAP tax rate in order to provide investors a better understanding of Lexmark’s operations consistent with its long-term projections for mix of income among various taxing jurisdictions.
• EPS of $0.81 in 2015 compares to $0.92 in the same period last year.

First Quarter Segment Revenue

• Imaging Solutions and Services (ISS) revenue of $766 million declined 6 percent year to year.
  • Managed Print Services (MPS)⁵ revenue of $185 million grew 3 percent year to year.
  • Non-MPS⁶ revenue of $533 million declined 6 percent year to year.
  • Inkjet Exit⁷ revenue of $48 million declined 34 percent year to year.
• Enterprise Software revenue was $86 million. Excluding adjustments, Enterprise Software revenue of $90 million grew 40 percent year to year.
  • Deferred software revenue⁸ increased 35 percent year to year.
  • Annualized subscription contract value⁹ increased 108 percent year to year.

First Quarter Higher Value Solutions Revenue

• Lexmark’s Higher Value Solutions revenue¹⁰ is comprised of Enterprise Software and MPS.
• Higher Value Solutions revenue excluding adjustments grew 13 percent year to year, accounting for 32 percent of total revenue, up from 28 percent in the same period in 2014.

First Quarter Annuity Revenue

• Lexmark is growing a more predictable Annuity revenue¹¹ base of laser supplies, Software maintenance, Software subscriptions and ISS extended warranty.
• Lexmark’s Annuity revenue of $2.419 billion for the trailing four quarters grew 5 percent compared to the same period a year ago, and comprised 70 percent of Core revenue.

Free Cash Flow

• The company delivered its 13^th consecutive calendar year of positive free cash flow¹² in 2014.
• The company’s calendar year 2015 outlook for free cash flow remains at 90 to 100 percent of non-GAAP net income.
• In the first quarter of 2015, free cash flow was -$47 million compared with -$34 million in the first quarter of 2014.
• Cash, including cash equivalents and current marketable securities, was $797 million at quarter end, $779 million of which was non U.S.-based.

Transforming Lexmark, Driving Shareholder Value

• Lexmark’s capital allocation framework delivers shareholder value through investments to build and grow Lexmark’s higher value software and solutions business, and through the return of capital to shareholders.
• Lexmark’s target is to return, on average, more than 50 percent of free cash flow to shareholders through quarterly dividends and share repurchases, and the company has returned 86 percent since the first quarter of 2011.
• In the first quarter, Lexmark returned $52 million to shareholders, which included paying the company’s 14^th consecutive quarterly dividend amounting to $22 million, and share repurchases of $30 million (0.7 million shares).

Lexmark to Acquire Kofax

• On March 24, 2015, Lexmark and Kofax Limited announced that the two companies entered into a merger agreement in which Lexmark will acquire Kofax for $11.00 per share in cash for a total enterprise value of approximately $1 billion.
• Upon successful completion, Lexmark will nearly double the size of its Enterprise Software business.
• In addition to the significant increase in scale, Kofax is expected to help accelerate the growth and significantly increase operating margins of Lexmark’s Enterprise Software business.
• This acquisition will be funded with Lexmark’s non-U.S. cash and existing credit facilities, and will result in an enhanced, more efficient balance sheet benefiting from the deployment of available overseas cash and existing balance sheet capacity.
• The acquisition demonstrates the continued execution of Lexmark’s capital allocation framework. The transaction will not impact Lexmark’s quarterly dividend, however share repurchases would be paused for 18 to 24 months while short term debt is paid.
• The acquisition is expected to close in the second quarter of 2015 and is contingent on Kofax shareholder approval, applicable regulatory clearances, and customary closing conditions.

Lexmark Named an Industry Leader in Smart MFPs

• Lexmark has once again been named as a leader in smart MFPs by IDC¹³.
• IDC analyzes the strategies and current capabilities of companies providing smart MFPs.
• As defined by the IDC MarketScape, leaders are companies that have led and continue to lead the market in both breadth of offering and strategic intent.
• In addition to smart MFPs, IDC has also named Lexmark a leader in Managed Print Services¹⁴three consecutive times.

Looking Forward – Second Quarter of 2015

• Core revenue is expected to be approximately flat year to year.
• Total revenue is expected to decline in the range of 2 to 4 percent year to year.
• GAAP EPS are expected to be around $0.07 to $0.17.
• Non-GAAP EPS are expected to be around $0.75 to $0.85.

Looking Forward – Full Year of 2015

• Core revenue is expected to decline slightly year to year.
• Total revenue is expected to decline in the range of 3 to 5 percent year to year.
• GAAP EPS are expected to be around $1.42 to $1.62.
• Non-GAAP EPS are expected to be around $3.60 to $3.80.

Conference Call Today

• The company will be hosting a conference call with securities analysts today at 8:30 a.m. (EDT). A live broadcast and a complete replay of this call can be accessed from Lexmark’s investor relations website at http://investor.lexmark.com. If you are unable to connect to the Internet, you can access the call via telephone at 888-693-3477 (outside the U.S. by calling 973-582-2710) using access code 18393863.
• Lexmark’s earnings presentation slides, including reconciliations between GAAP and non-GAAP financial measures, will be available on Lexmark’s investor relations website prior to the live broadcast.

About Lexmark

Lexmark (NYSE: LXK) creates enterprise software, hardware and services that remove the inefficiencies of information silos and disconnected processes, connecting people to the information they need at the moment they need it. Open the possibilities at www.Lexmark.com.

Lexmark, the Lexmark logo and Open the possibilities are trademarks of Lexmark International, Inc., registered in the U.S. and/or other countries. All other trademarks are the property of their respective owners.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: Statements in this release which are not historical facts are forward-looking and involve risks and uncertainties which may cause the company’s actual results or performance to be materially different from the results or performance expressed or implied by the forward-looking statements. Factors that may impact such forward-looking statements include, but are not limited to, fluctuations in foreign currency exchange rates; failure to successfully integrate newly acquired businesses; continued economic uncertainty related to volatility of the global economy; inability to execute the company’s strategy to become an end-to-end solutions provider; decreased supplies consumption; possible changes in the size of expected restructuring costs, charges, and savings; market acceptance of new products; aggressive pricing from competitors and resellers; changes in the company’s tax provisions or tax liabilities; excessive inventory for the company’s reseller channel; failure to manage inventory levels or production capacity; periodic variations affecting revenue and profitability; inability to realize all of the anticipated benefits of the company’s acquisitions; the failure of information technology systems, including data breaches or cyberattacks; the inability to develop new products and enhance existing products to meet customer needs on a cost competitive basis; reliance on international production facilities, manufacturing partners and certain key suppliers; business disruptions; increased competition in the aftermarket supplies business; inability to obtain and protect the company’s intellectual property rights and defend against claims of infringement and/or anticompetitive conduct; ineffective internal controls; customer demands and new regulations related to conflict-free minerals; fees on the company’s products or litigation costs required to protect the company’s rights; inability to perform under managed print services contracts; the inability to attract, retain and motivate key employees; terrorist acts; acts of war or other political conflicts; increased investment to support product development and marketing; the financial failure or loss of business with a key customer or reseller; credit risk associated with the company’s customers, channel partners, and investment portfolio; the outcome of litigation or regulatory proceedings to which the company may be a party; unforeseen cost impacts as a result of new legislation; changes in a country’s political or economic conditions; disruptions at important points of exit and entry and distribution centers; and other risks described in the company’s Securities and Exchange Commission filings. The company undertakes no obligation to update any forward-looking statement.

(1)    In an effort to provide investors with additional information regarding the company’s results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release non-GAAP financial measures such as EBITDA, Adjusted EBITDA, earnings per share amounts and related income statement items which management believes provides useful information to investors. When used in this press release, “non-GAAP” Adjusted EBITDA, earnings per share amounts and related income statement items exclude restructuring charges and project costs, acquisition and divestiture-related adjustments and pension plan actuarial gains/losses. The rationale for management’s use of non-GAAP measures is included in Appendix A to the financial information attached hereto.
(2)    Core revenue is defined as total Lexmark revenue minus Inkjet Exit revenue.
(3)    Constant currency is calculated by adjusting current year and prior year results to remove estimated currency rate impacts and related hedge gains and losses.
(4)    Adjusted EBITDA is defined as net earnings plus net interest expense (income), provision for  income taxes, depreciation and amortization, excluding restructuring charges and project costs, acquisition and divestiture related adjustments and pension plan actuarial gains or losses.
(5)    MPS revenue is defined as ISS laser hardware, supplies and fleet management solutions sold through a managed print services agreement.
(6)    Non-MPS revenue is defined as ISS laser hardware, laser supplies, dot matrix hardware, and dot matrix supplies not sold as a part of an MPS agreement. Non-MPS also includes parts and service related to hardware maintenance.
(7)    Inkjet Exit is defined as consumer and business inkjet hardware and supplies that the company is exiting.
(8)    Deferred software revenue is defined as amounts billed to customers but not yet recognized as software revenue.
(9)    Annualized subscription contract value indicates value for the upcoming four quarters.
(10)  Higher Value Solutions revenue is defined as combined MPS and Enterprise Software revenue.
(11)  Annuity revenue includes laser supplies, laser extended warranty, software subscriptions, and software maintenance for the trailing four quarters.
(12)  Free cash flow is defined as net cash flows provided by operating activities minus purchases of property, plant and equipment plus proceeds from sale of fixed assets.
(13)  IDC MarketScape: U.S. “Smart” Multifunction Peripheral 2014 – 2015 Vendor Assessment, doc #254761, March 2015.
(14)  IDC MarketScape: Worldwide Managed Print and Document Services 2014 Vendor Assessment – Focus on Managed Workflow Services September 2014, IDC #250631